Reserve Bank’s Intervention Marks ‘New Direction’ in Currency War
The Wall Street Journal uses the Reserve Bank of New Zealand’s [RBNZ] recent action to bring down the NZ dollar as an example of the ‘new direction’ in what it calls the global currency war –‘intervention’. Until now, writes the Journal, competitive devaluation has been driven largely by the major central banks pursuing easy monetary policies to both boost borrowing and make their currencies cheaper. ‘Then along came the Reserve Bank of New Zealand,’ writes Nick Hastings. The Journal notes that ‘like most other central banks [the RBNZ] has responded to the global financial crisis by reducing interest rates. But, unlike most countries, New Zealand has fared quite well’, he says. But, the NZ Dollar has come under upward pressure as central banks in most other developed nations reduce their interest rates ever downwards. This makes the NZ currency more attractive to investors, Hastings notes. ‘The prospect of New Zealand rates, and the New Zealand dollar, looking even more attractive was not good news for the RBNZ. So, seeing that it couldn’t do what other central banks were doing and cut rates, because of an overheated housing market, the RBNZ decided to intervene, writes Hastings. The Wall Street Journal quotes the RBNZ’s governor, Graeme Wheeler, admitting to Parliament that the Bank had conducted ‘some intervention’ and was ‘capable of further intervention.’ Hastings writes that, ‘Mr. Wheeler’s admission wasn’t a major surprise given the performance of the New Zealand dollar. But it was an indication of just how far central bankers are now going to keep their currencies as competitive as possible’. Often, Hastings explains, when a central bank intervenes, it is keen to attract as much attention as possible. The louder it beats its drum, the more it might scare buyers away and the more successful the whole exercise should be. ‘That was not the case for the RBNZ. In the current climate, manipulating your currency in your favor quite so publicly is likely to make you a pariah…with the International Monetary Fund. Mr. Wheeler only made his admission when forced to under questioning,’ according to Hastings, who then questions the effectiveness of the intervention. ‘Now that his tactic has been confirmed, he could find that intervention not only becomes less effective, as the market starts to test the central bank’s resolve, but it may also attract international criticism, making it more difficult for the RBNZ to continue’. But, Hastings admits, the RBNZ’s currency intervention is part of a growing trend. ‘The weapons central banks are willing to employ in the currency war seem to be getting just that little bit heavier’, he concludes. The New Zealand dollar tumbled to 83.90 US cents from 84.48 cents following Wheeler’s disclosure. Wheeler has previously said the currency was ‘significantly overvalued’. New Zealand’s Minister of Finance, Bill English, thought the intervention would have a minimum impact on the NZ dollar’s value. English told local reporters the RBNZ didn’t have to ask the government for authority to intervene. ‘They know they can’t beat the whole market, but there are limited circumstances where they believe they can influence the exchange rate,’ Minister English said.